If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Petrol AD (BUL:PET) so let's look a bit deeper.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Petrol AD is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.013 = лв1.0m ÷ (лв153m - лв78m) (Based on the trailing twelve months to December 2021).
Therefore, Petrol AD has an ROCE of 1.3%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 13%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Petrol AD's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Petrol AD, check out these free graphs here.
How Are Returns Trending?
The fact that Petrol AD is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 1.3% on its capital. In addition to that, Petrol AD is employing 3,285% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
One more thing to note, Petrol AD has decreased current liabilities to 51% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.
What We Can Learn From Petrol AD's ROCE
To the delight of most shareholders, Petrol AD has now broken into profitability. Although the company may be facing some issues elsewhere since the stock has plunged 90% in the last five years. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
One more thing, we've spotted 4 warning signs facing Petrol AD that you might find interesting.
While Petrol AD isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.